AUDITING THEORY

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Transcript of AUDITING THEORY

The REVENUE and RECEIPT Cycle - encompasses both the sale of goods or services to customers (revenue) and the collection of cash (receipt). This cycle is related to each of the other three transaction cycles, since it... receives resources and information provided by the financing and conversion cyclesprovides resources and information to the expenditure/disbursement cycle Two major business functions are associated with the cycle.. resources (goods or services) are sold to customers in exchange for promises of future paymentcash is collected from customers The Scope of Revenue/Receipt Cycle Business Functions Common Activities Common Entries Common Forms resources are sold to customers in exchange for promises for future paymentscash is collected from customers for resources sold to them customer orders (order entry)credit approvalinventory controlshippingbillingrecordingcash collection (and deposits)sales returns salessales discountssales returns and allowancescash receiptsallowance for uncollectible accountswrite-off or specific uncollectible accounts customer ordersales ordershipping documentsales invoicecustomer remittance advice Paper or electronic documents affecting the revenue/receipt cycle include: CUSTOMER ORDER (a request from a customer to purchase goods) SALES ORDER (identifies goods ordered by a customer, including relevant information about price, quantity, payment terms, etc. SHIPPING DOCUMENT(identifies good shipped, and represents a contract between the seller and carrier; a shipping document is often in the form of a bill of lading, a Uniform Commercial Code document used by common carriers) SALES INVOICE(identifies goods sold and represents formal notice to a customer about the amount and terms of payment; often called the bill) CUSTOMER REMITTANCE ADVICE(accompanies a sales invoice but is intended to be returned with a customer's payment; a returned remittance advice indicates the purpose of a cash payment, facilitating, handling and recording) CREDIT SALES SUMMARY OF CREDIT SALES ACTIVITIES Customer Order DepartmentAccept customer orderPrepare sales order, distribute copies, and retain copy in unfilled order file Credit DepartmentReview sales order and investigate customer credit informationInitial copy of sales order if credit is approved and forward the order to Inventory Control. If credit is denied, notify the Customer Order department Inventory ControlReview sales orderInitial copy of sales order to authorize the release of goods from the warehouseForward goods and a copy of the sales order of Shipping, and retain a file copy of the sales order ShippingCompare sales order from Inventory Control with sales order from Customer OrderExamine goods from warehouse and compare with sales orderPrepare goods for shipment and compare shipping documentsRelease goods to carrier and obtain receiptNotify Customer Order department that goods have been shippedForward copy of sales order and shipping documents to Billing, retain file copy of sales order and shipping documents BillingCompare documents from Shipping with sales order from Customer OrdersPrepare sales invoice, send copy to customer and to Inventory Accounting along with copy of sales order and shipping documents, and retain file copyPrepare daily sales summary, send copy to General Accounting, and retain file copy RecordingInventory Accounting : Enter cost information on sales invoice, update inventory records, and forward sales invoice and related documents to General AccountingGeneral Accounting Record sales and forward sales invoice and related documents to Accounts ReceivableAccounts Receivable: Post sale to customer's account and file sales invoice and relaed documents CASH COLLECTION CASH COLLECTIONThe Revenue/Receipt is completed for a transaction when cash is collected for the goods and services sold. SALES RETURNS AND ALLOWANCESCustomer requests for adjustments on returns. Goods should be reviewed by personnel independent of cash collection and recording. An approved request is documented as a credit memo, copies of which are forwarded to Accounts Receivable for posting and to Inventory Control. UNCOLLECTED ACCOUNTSAccounts Receivable personnel should review individual customer accounts periodically as a check against unauthorized credit limits and prepare monthly Accounts Receivable trial balance for reconciliations with general ledger controls accounts. In addiion, Accounts Receivable balance are aged periodically and reviewed by personnel independent of the Credit department.Note: Delinquent accounts should be reviewed periodically by personnel who report to the treasurer and are independent of recording functions. Control Activities Types of Errors or Frauds That Could Occur If Objective Is Not Met Control Activities Designed to Prevent or Detect Errors or Frauds Transaction Authorization Customers' credit should be approved prior to shipping goods. Shipments could be made to unauthorized parties, potentially resulting in uncollectible accounts receivable. Perform a credit check for all new customers.Prepare and periodically update lists of authorized customers, indicating a maximum credit limit for each customer. Maintain updated lists of authorized prices and sales terms.Establish procedures for reviewing and approving prices and sales terms before shipment. Orders could be accepted at unauthorized prices or unfavorable sales terms, potentially resulting in reduced revenues or inadequate cash flows. Unit prices and sales terms should be established for all products or services. Sales-related deductions and adjustments should be made in accordance with management's authorization. Unauthorized deductions or adjustments could be granted to undeserving customers, potentially resulting in uncollectible receivables.Otherwise collectible accounts receivable could be written off, potentially resulting in failure to realize the service potential of asset. Establish written criteria and policies for granting sales deductions and adjustments.Prenumber and control credit memoranda or other related forms. Shipments could be delivered to the wrong party, potentially resulting in uncollectible accounts receivable.Shipments could be delivered too late, potentially resulting in returned goods and canceled sales.Incorrect shipments could be delivered, potentially resulting in returned goods and canceled sales. Verify that ordered products are in stock, and therefore can be shipped on a timely basis.Limit access to shipping documents to authorized personnel.Document policies and procedures for scheduling shipments. Transaction Execution Approved orders should be shipped in accordance with customer specifications and on a timely basis. Shipments could go unbilled, potentially resulting in loss of revenue.Shipments could be billed late, resulting in delayed cash payments from customers. Prenumber bills of lading and assure that related billings are made on periodic (e.g., daily) basis.Establish procedures for prompt reporting and investigation of shipments not billed (and billings not shipped).Require prompt delivery of bills of lading (and related sales orders) to the billing department. All shipments should be followed by prompt billing. Total input documents (e.g., number of documents, dollar amounts) and reconcile appropriates journals and ledgers.Establish processing and recording procedures.Compare actual and planned (e.g., forecasted, budgeted) results, and analyze variances. General ledger account balances may be inaccurate, potentially resulting in misstated financial statements. Sales, cash receipt, and related transactions should be recorded at the correct amounts, in the proper period, and should be properly classified. Recording Reconcile totals of individual customer accounts with control totals.Promptly investigate correspondence from customers.Reconcile input totals with processed and output totals.Review customer statements for accuracy and follow up discrepancies. Summaries of detailed accounts may not agree with control accounts, potentially resulting in adjusting journal entries prompted by inaccurate information.Transactions may be posted to improper customer accounts, potentially resulting in improper billings. Billings, collections, and related adjustment transactions (e.g., returns and allowances) should be posted accurately to individual customer accounts. Periodically substantiate and evaluate recorded account balances.Reconcile subsidiary ledgers with general ledger control accounts.Establish policy and procedures manuals, organization charts, and supporting documentation (e.g., compare selected customer balances with underlying documents).Follow up promptly on customer complaints. Accounts may include error or frauds, potentially resulting in materially misstated financial statements.Management decisions may be based on erroneous data, potentially resulting in improper decisions. Recorded accounts receivable balances (and related transactions) should fairly reflect underlying transactions and events. Establish the cash receipts function in a centralized location.Require daily reconciliation of cash receiptsrecords with bank deposit slips.Prenumber and control cash remittance advices.Prepare separate lists of incoming cash receipts in the mailroom.Separate responsibility for handling and recording cash.Establish periodic procedures for reconciling cash records with bank statements.Establish physical barriers over cash and unused checks.Maintain insurance and fidelity bonds for personnel handling cash.Maintain listings - and signature samples - of authorized signatories.Inform the bank that no checks payable to the company are to be cashed (i.e., deposited only)Restrictively endorse checks received from customers. Cash receipts on credit sales could be lost ordiverted, potentially resulting in overstated accounts receivable and unrecorded cash.Cash receipts on noncredit sales could be unreported, potentially resulting in unrecorded cash.Cash shortages could go undetected, potentially resulting in lost cash and overstated cash balances. Access to cash and cash-related records should be restricted to personnel authorized by management. Access to Assets Segregate responsibilities for authorization, execution, and recording functions.Prenumber and control custody of forms and documents. Records or assets may be misused, potentially resulting in misappropriated assets. Access to shipping, billing, inventory control, and accounting records should be restricted to personnel authorized management. Control Objectives, Potential Errors or Frauds, and Control Activities THANK YOU! Mail Room Cash Receipts Customer OrderDepartment CreditDepartment InventoryControl Shipping Billing Revenue/Receipt CyclePotential Errors or Irregularities and Specific Control Procedures ORDER ENTRYPotential Errors / IrregularitiesShipments could be made o customers who would eventually not pay their accountsUnauthorized adjustments could be madeShipments not based on approved customers' orders could be madeGoods to be shipped may not meet customers' specifications and may result to dissatisfaction and significant returns or uncollectible accountsSpecific Control ProceduresApproval of customers, credit limits and terms, and prices. Such approval should be made by persons not involved in order entry function. Updated lists of customers, credit limits and terms, and prices should be made available to sales department personnel.Use of prenumbered sales or work orders and accounting for its completenessFollow-up missing documents. Results of follow-up procedures done should be reviewed and approved by a designated official.Adequate written procedures for order entry function SHIPPINGPotential Errors / IrregularitiesUnauthorized shipments could be madeCustomers could be billed for goods that were not receivedUnbilled shipmentsSpecific Control ProceduresShipments should not be made without approved customer ordersPhysical count and inspection of goods at the time of shipmentUse of prenumbered shipping documents and accounting for its completenessMaintaining records of unmatched (undelivered checks)Follow-up procedures on missing shipping documents and unmatched ordersReview and approval of follow-up procedures doneAdequate written procedures for shipping function BILLINGPotential Errors / IrregularitiesUnbilled shipmentsCustomers could be over / under invoicedSpecific Control ProceduresUse of prenumbered sales invoices and accounting for its completenessFollow-up of missing documents. Review and approval of follow-up procedures done.Calculation of control totals for posting to control (general ledger) accounts before invoices are routed to accounts receivable accounting for posting to subsidiary ledgersComparison of invoiced prices and quantities to shipping documents, approved sales orders, and standard price listsChecking the accuracy of invoice extensions and foorings by persons other than those who prepare invoicesAdequate written procedures for billing function ACCOUNTINGPotential Errors / IrregularitiesInvalid transactions could be taken up to conceal errors or irregularitiesGeneral and subsidiary ledgers could be forced balanceCash receipts could be misappropriated and covered-up by taking up invalid adjustments to accounts receivable balance such as unauthorized write-offsSpecific Control ProceduresSales and accounts receivable balances should be periodically compared to balances of prior periods, budgeted amounts, or averages published by the industry in which the company operatesThe subsidiary ledgers should be maintained by persons other than those who maintain the control account, prepare, check, or approve accounts receivable documents, or those involved in the cash receipts functionPeriodic (e.g., monthly) statements of accounts should be sent to customers. Exceptions noted by customers should be promptly investigatedPeriodic review of customers' accounts with credit balancesPreparation of accounts receivable aging scheduleIdentification of worthless accounts for write-offs Periodic review of the adequacy of valuation allowances such as bad debts, returns, and discountsAdequate written procedures for accounting function CASH RECEIPTSPotential Errors / IrregularitiesCash receipts could be misappropriatedDelays in recording cash receiptsSpecific Control ProceduresUse of prenumbered official receipts and accounting for its completenessPreparation of a list of cash receipts at the time of receiptRestrictive endorsement of checks received (e.g., for deposit only to the accounts of...)Establishment of control totals for posting to control accounts before cash receipt documents are routed to the accounts receivable subsidiary ledgers clerkComparison of actual amount received with the initial cash receipts recordsComparison of cash receipts record with bank-validated deposit slips, cash receipt book, and bank statementAdequate written procedures for cash receipts function SALES RETURNS AND ALLOWANCESPotential Errors / IrregularitiesCustomers may be given credit for goods returned but were not receivedDamaged merchandise may be included in inventories as its original costUnrecorded returnsGoods returned in the current period may not be included in the inventory accountSpecific Control ProceduresThe description, condition, and quantity of goods returned should be checked at the time of receiptUse of prenumbered receiving reports and credit/debit memosAccounting for the numerical sequence of receiving reports and debit/credit memos and follow-up of missing documents. A designated official should review and approve the results of follow-up procedures done.Receiving reports should be matched with debit/credit memos